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Apple Inc. (AAPL): Is Market Share In Danger Here?

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Apple Inc. (NASDAQ:AAPL) recently posted its second quarter results, and they came in below analysts’ estimates. However, this did not affect its share price as the company announced a massive cash return of $100 billion through 2015, including share buybacks and increased dividends. Let’s take a look at the company’s most recent results and its future from a competitive standpoint.

Apple Inc.How was Apple’s performance behind that juicy dividend?

The California-based company revenue increased 11.2% year on year (YoY) to $43.6 billion, while net profit fell 18.1%, which clearly shows that the company’s net profit margin is plunging. But not only net margins are shrinking, Apple Inc. (NASDAQ:AAPL)’s gross margin also decreased to 37.5% from 47.4%. Apple sold more iPods and iPads but generated less net income than the comparable quarter a year ago. Undoubtedly, this is a very ugly sign.

Competition should be blamed for Apple Inc. (NASDAQ:AAPL)’s margin erosion. Competitors from Samsung to the re-surging Sony Corporation (ADR) (NYSE:SNE) are coming up with cheaper devices, and much more often increasing their R&D investment needs. As always, competition is great for consumers but not so much for investors.

Apple’s Market Share Is In Danger.

Although PC shipments have been declining, the market for tablets and smartphones has been increasing worldwide. As a matter of fact, during 2012 the market for tablets and smartphones grew by 78.4% and 46.1%, respectively.

According to IDC, Amazon.com, Inc. (NASDAQ:AMZN) has 11.5% of the tablet market share, compared to 43.6% for Apple Inc. (NASDAQ:AAPL) and 15.1% for Samsung. Apple Inc. (NASDAQ:AAPL) is clearly the biggest player in the tablet market. That said, Samsung, the second biggest player with its hybrid Galaxy Note tablets, is growing fast. The Korean company, which increased its revenues by 17% YoY in the first quarter, could start grabbing as much momentum with its tablets as it did with its phones.

Samsung’s mobile division, which generates almost 75% of the company’s operating profits, is the worldwide market share king in the segment. While Sony Corporation (ADR) (NYSE:SNE) and Apple control 4.5% and 21.8% of the smartphone market, Samsung controls 29%. Its cheaper and more flexible devices have been stealing market share from Apple for a while. This is what should really make Apple’s investors worry.

Apple still has a strong market positioning

Natrally, Apple still has a solid position in the tablet and smartphone market. However, investors should not only look at the hefty dividend payout but also to future cash flow generation. This market is very unpredictable and Apple, as well as any other company in this competitive business, needs to invest in R&D to develop new products. An example of this instability in the technology sector is given by Nokia Corporation (ADR) (NYSE:NOK)’s decline in market share in the past few years: from 32.9% in 2010, to 15.6% in 2011, and 4.9% in 2012.

Last year Samsung took a decisive lead in the smartphone market, selling almost 50% more smartphones than Apple. Samsung’s market share gains were mainly a result of a number of low-end Android smartphones it has flooded the markets with. Going forward, this market will gradually become more saturated and margins will fall. This will be the moment to face the inevitable by penetrating the high-end developed markets more and taking market share away from Apple. That said, it will not be easy to penetrate Apple’s market. Apple has generated an ecosystem through iTunes and Apple customers would have to pay a hefty price in order to switch from Apple to Android.

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